Copper Mountain (TSX: CMMC) reported Q4 financial results and provided 2020 production guidance. While the reaction has been muted, we believe this copper miner has substantial long-term potential.
For unfamiliar investors, Copper Mountain is a mid-tier copper miner with assets in Canada and Australia. While copper is their primary metal, they also produce small amounts of gold and silver.
Their primary asset is the Copper Mountain copper mine in British Columbia, in which they hold a 75% ownership stake. They are also developing the Eva Copper project in Australia, which is due for an updated feasibility study in 2020 Q1.
Our Take
From an investment perspective, Copper Mountain meets two important criteria:
- Cheap on a P/NAV basis
- Assets in safe jurisdictions (Canada, Australia)
Looking at their peers, they are the cheapest mid-tier copper miner with a P/NAV of 0.23x.
Price to NAV
Their biggest detractor, substantial debt on the balance sheet, could translate to an excellent leveraged play on rising copper prices over the medium to long term.
Admittedly, 2020 copper prices are unclear at this time given the unknown effects of the coronavirus and the uncertainty in global growth this has created. However, the long-term structural factors for the increase in copper price remain. Electrification on a global scale will generate a meaningful supply deficit for copper.
Given the recent softness in the pricing of copper miners, this could be an excellent opportunity to build a position to capitalize on the medium to long term growth in the copper price.
With the debt due in portions spit across 2020-2023, Copper Mountain should realize the benefits of increased copper pricing, creating an investment opportunity with significant torque.
Looking more closely at their assets, CMMC updated reserves and resources for their Copper Mountain mine in the quarter, with increases of 12% and 9%. However, on the year, mine life was increased from 17 years to 31 years on the back of a 127% increase in reserves.
Their Eva Project in Australia also saw increased resources in the quarter and an updated feasibility study for the project is expected in 2020 Q1.
Looking at guidance, the company is guiding to nearly a 25% increase in copper equivalent production at the mid-point. Costs are being guided significantly lower year over year.
As we progress through 2020, investors should watch closely for signs that execution is progressing as expected. If costs remain on track, this will be an excellent sign for CMMC.
Further, they are expanding mill throughput from 40,000 tpd to 45,000 tpd and increasing recoveries, which should help improve mine economics. However, the benefits likely won’t be realized until 2021.
Overall, we like the catalysts on the horizon for Copper Mountain. While operational performance has been challenged recently, management is indicating there are brighter days ahead.
The debt on their balance sheet is concerning, however, we believe this creates a solid leveraged play in long-term copper strength. Notably, this does make CMMC a more risky investment whose stock price more closely tracks that of copper.
On a positive note, additional colour provided by management during the conference call de-risked some of the debt.
The term loan portion of their long-term debt is guaranteed by Mitsubishi with an agreement in place for Mitsubishi to cover upcoming payments, reducing the burden on CMMC. Further, the short-term notes with Mitsubishi (now converted to long-term debt) are very flexible, where payments will be made only when mine cash is flowing.
As 2020 progresses and the company demonstrates they can execute on their guidance, Copper Mountain could become a very attractive investment.
Operational and Financial Results
On a year-over-year basis, Copper Mountain saw copper production decrease 10% to 71.95 Mlb as the company worked through low-grade zones. Gold and Silver production saw a slightly smaller decrease year over year.
2019 Cash costs ($1.92/lb) and AISC ($2.06/lb) were notably higher in Q4 and 2019 than 2018 ($1.77/lb, $1.94/lb) due to higher unit costs from reduced grade and mine developments. Looking forward, CMMC is guiding to cash costs of $1.375/lb and $1.50/lb at the midpoint for 2020.
Looking at the financials, Copper Mountain generated $288.5 million in revenue in 2019 compared to $296 million in 2018 (3% decrease). The stronger revenue generation (relatively, compared to production) was due in part to stronger gold prices.
On the year, CMMC generated $25 million in gross profit and $30.4 in adjusted EBITDA, led largely by strong operating performance in 2019 Q1. The net loss on the year was -$25.9 million, driven by the one-time $48.7 stockpile write-down.
Looking at balance sheet health, Copper Mountain is sitting with $32.1 million in cash. On the year, their net CFO was $51.2 million, with a CFI of -$47.6 million.
While they had working capital of -$112 million, subsequent to year-end, $101 million was moved from a current liability into long-term debt. The lender, Mitsubishi Materials Corporation (owner of the remaining 25% stake in Copper Mountain), agreed to extend the notes to June of 2023. This leaves CMMC with working capital of -$11.1 million.
While the CMMC did record a stockpile write-down of $48.8 million, this was due do the movement of low-grade stockpiled to 2038. After releasing the reserve and resource update, the company was required to adjust the value of the stockpile on a time-value basis, resulting in the one-time write down.
